Bonds, returns and business math Updated November 2026

WACC

The weighted average cost of capital is the average return a company must earn: WACC = E/V x Re + D/V x Rd x (1 - T), where E and D are market values of equity and debt, Re the cost of equity, Rd the pre-tax cost of debt and T the tax rate.

Syntax

WACC = E/V x Re + D/V x Rd x (1 - T)

Part	What it is
`E, D`	Market values of equity and debt; V = E + D
`Re`	Cost of equity, often from CAPM: Rf + beta x (Rm - Rf)
`Rd`	Pre-tax cost of debt (yield on the company's bonds or loan rate)
`T`	Corporate tax rate

Examples

60% equity at 10%, 40% debt at 6%, tax 25%
0.6 x 0.10 + 0.4 x 0.06 x 0.75

Result: WACC = 7.80%

70% equity at 12%, 30% debt at 5%, tax 21%
0.7 x 0.12 + 0.3 x 0.05 x 0.79

Result: WACC = 9.585%

E = 500, D = 500, Re = 9%, Rd = 7%, T = 21%
0.5 x 0.09 + 0.5 x 0.07 x 0.79

Result: WACC = 7.265%

Common mistakes

Forgetting the (1 - T) on debt: interest is tax deductible, so the after-tax cost of debt is lower than the coupon rate.
Using book values for the weights when market values are available; market values reflect what investors actually require.
Applying the company WACC to a project that is much riskier or safer than the company's average business.

Practice WACC

These drills check your answer on live data, free, no account needed.

Weighted average cost of capitalA company has equity worth $2,500,000 and debt worth $6,000,000 at market value. Its cost of equity is 16%, its pre-tax cost of debt is 7.5%, and its tax rate is 25%. What is its WACC?
After-tax cost of debtA company's bonds yield 3% before tax, and its marginal tax rate is 16%. What is its after-tax cost of debt?

Questions

Why is debt cheaper than equity?

Lenders are paid first and have a fixed claim, so they bear less risk and demand a lower return, and interest is tax deductible. Equity holders take the residual risk and expect more.

What is a typical WACC?

Roughly 6% to 10% for large established companies in normal rate environments, higher for small or risky firms. It moves with interest rates and the company's leverage.

After-tax cost of debtThe after-tax cost of debt is the interest rate times one minus the tax rate, because interest is deductible. Examples, finding the pre-tax rate, mistakes.
NPV (net present value)Net present value is the sum of discounted cash flows minus the initial investment. Examples at 10% and 8%, the accept rule, Excel NPV and the sign mistake.
IRR (internal rate of return)The IRR is the discount rate that makes NPV zero. How to find it by trial, what Excel IRR returns, worked examples, the accept rule and where IRR fails.
PerpetuityA perpetuity pays a fixed amount forever and is worth PV = C / r. The growing perpetuity formula C1 / (r - g), examples for preferred stock and dividends.